Tuesday, December 23, 2008

Fiat money instability

A long-term Dow to gold ratio chart over the past 200 years demonstrates what the Federal Reserve and government actions have done to the long-term prosperity of the United States (chart stolen from www.sharelynx.com):

Prior the the Fed taking the helm as the steward of our currency from 1800-1913, the dow to gold ratio was a choppy ratio indicating boom-bust swings, but in a steady uprising channel. When the Fed took over, a wild boom followed shortly thereafter, culminating in the bust that is now called the great depression. However, we stayed within the uptrending channel and recovered.

Once we severed the link between our dollar and gold in 1971 when Nixon closed the gold window, we broke through the 170 year trendline and embarked on a new era of instability and now, decline. The boom from 1980 to 2000 was even wilder in gold terms and the ongoing bust promises to be even worse than the 1930s or 1970s. The Dow to gold ratio should decline to less than 1 in this unstable megaphone-like chart pattern, portending severe economic crisis. I have absolutely no doubt in my mind that we will reach one for this ratio and probably decline below one. Remember that this ratio is based on the Dow Jones Industrial Average "price" divided by the price of one ounce of gold.

If the Federal Reserve and our government are so good at what they do, why are the boom bust cycles getting wilder rather than tamer? Where is the steady uptrending prosperity seen before the Fed took over? This chart is the most damning condemnation of the course our nation has chosen over the past 100 years. How can the price of one ounce of a barbarous relic metal be equal to the entire mighty Dow Jones industrial average? It happened as recently as 1980 and will happen again within the next 5-10 years (possibly sooner). This is not stability, but rather, a portrait of profound instability.

For those who believe "the powers that be" will fix the system, ask yourself a basic question: if "they" are so smart, why did they let this crisis occur in the first place? Why would the people in charge, who utterly failed to see or warn of this crisis even once it was obvious, be the people to ask to fix this mess?

Whether thru hyperdeflation, hyperinflation or a little of both, gold has a long way to rise and/or stocks have a long way to fall relative to each other before one should think about becoming a "buy and hold" general stock investor in the United States. By giving stewardship of our currency to a group of secretive bankers and then severing the link of our currency to gold, we assured a path towards decreased prosperity. We have now started down this slippery path in earnest. Invest accordingly and hold physical gold coins and/or bars as insurance and a way to protect any savings you have.